Meaning of Audit Report
Audit report refers to a formal opinion provided by auditor regrading the validity and reliability of financial statements of organization. It is a final stage of auditing process and serve as a medium for communicating auditing results by auditor. Auditor report may be either submitted by an internal auditor or external auditor. This report provides reasonable assurance that financial statements comply with generally accepted accounting principles (GAAP) and are free from any errors.
Auditor report is a key document that is mostly preferred by bank, creditors and investors for getting information about company affairs. These peoples take their decision for lending amount to companies on the basis of audit report. A clean auditor report represents the transparency and fairness in financial statements of company whereas an adverse report means that financial statements have discrepancies, misrepresentations and do not comply to GAAP. Auditor by preparing auditing report certifies the financial position and accounting records of business enterprise. They are appointed for carrying out evaluation of accounting books by shareholders and therefore auditors work towards protecting the rights of shareholders of company.
Format of Audit Report
The format of audit report is discussed in detail as given below: –
- Title of the report: A title of report should be proper which enables it in easily identifying. It should the name of client which enables in distinguishing audit report from other reports.
- Name of the addressee: Addressee refers to one who appoints the auditor and to whom report of auditing is presented. When auditor is appointed by a company then addressee are shareholders. A complete address of addressee is needed as per the requirements of law. Shareholders are addressee in case of statutory audit whereas in case of special audit, central government is the one.
- Introductory paragraph: The introductory paragraph denotes the opinion of auditor on financial statements that are evaluated by him. Period of financial statements should be clearly mentioned along with dates.
- Scope: The scope defines manner in which evaluation of book of accounts has been done by auditor. An auditor in his evaluation should consider the accounts of company, profit and loss account, cash flow statements and balance sheet. The examination should be done in accordance with relevant law and not curtail any examination task.
- Opinion: The opinion given by auditor regarding financial statements and book of accounts of organization is free from bias and based on information. Auditor need to give opinion regrading following: whether all financial statements are arithmetically true and as per the figures in accounts book, whether financial statements in case of unqualified opinion are showing fair view of result of operations and state of affairs and in case of qualified opinion if P&L account and a balance sheet are not depicting a fair position then what are the reason for such wrong results.
- Signature: Signature refer to the manual signature of auditor that confirms the authenticity of audit report. Personal name and signature of auditor should be provided.
- Place of signature: It denotes the location of auditor or an auditing firm where signing of report takes place.
- Date of the report: Date of report shows the date of completion of auditing work.
Types of Audit Report
There are four types of audit report which are as given below:
- Unqualified opinion
- Qualified opinion
- Adverse opinion
- Disclaimer of opinion
Unqualified opinion: It is also termed as clean audit report which is issued by auditor when all financial statements and books of accounts are free form any discrepancies and misrepresentations. Unqualified opinion report also assures that all statements are prepared in compliance with standards known as generally accepted accounting principles (GAAP). It is the best audit report that an organization can receive from an auditor.
Qualified opinion: A qualified opinion report is issued by auditor when financial statements do not comply with GAAP but no misrepresentation of facts having higher impact are identified. Writing of qualified opinion is also same to unqualified opinion. However, an additional paragraph describing the reason for not issuing an unqualified audit report is include in a qualified opinion report.
Adverse opinion: Adverse opinion is the worst type of audit report that can be issued to business organization. It shows that financial records maintained by firm do not comply with GAAP and have been grossly misrepresented. It is an indication of fraud and sometimes it may take place by error. A company receiving this type of audit report by auditor need to rectify its financial records and get it re-audited in order to get clean report. Lenders, investors and other requesting parties do not generally accept this type of audit report.
Disclaimer of opinion: Disclaimer of opinion is issued where an auditor is unable to form opinion due to absence of sufficient evidences. He may not complete an audit report and issues disclaimer of opinion which states that opinion regarding financial status of firm cannot be determined.
Importance of Audit Report
Various importance of audit report for firm can be well-understand from points given below: –
- Provide independent view: Audit report presented by external auditor gives an independent view of financial position of business. The report consists of unbiased opinion by business which assures owner and investors of true and fair view of business affairs. External auditor will inspect the book of account without any hidden agenda and detect all misrepresentations and fraud.
- Enhance credit rating: Another important advantage provided by audit report is that it enhances overall credit rating of companies. Organization receiving clean audit report (unqualified opinion report) from auditor are easily able to attract lenders and investors. Clean audit report reflects that company is adequately complying with required laws for maintaining book of accounts and preparation of financial statements.
- Moral check: Audit report enable companies in keeping a moral check over the activities of all employees working within it. Staff and other workers act honestly and do not steal or defraud the company as they know that all book of account will be evaluated. Any irregularities or misrepresentations in business can be easily identified which helps staff in being responsible at all times.
- Stakeholders confidence: The financial statements of company have more credibility after getting examined by an independent auditor. Every stakeholder of company such as banks, creditors, debenture holders, investors etc. rely with confidence more on the audit report of business for knowing their financial position.